The City watchdog has warned homeowners with interest-only mortgages that they face a "wake-up call" because up to half will not have enough money to pay their loans back.

The Financial Conduct Authority says around 2.6 million people with interest-only mortgages have no plan for repayment.

What is the difference between an interest-only mortgage and a capital and interest mortgage?

  • You only repay the interest with an interest-only loan, and you do not repay the original loan until the final date.

What should you do if you think you can't pay off your mortgage?

  • Your lender will be keen to discuss your situation with you and help you work out what options are available if you suspect you will be unable to pay off your mortgage at the agreed date.

Will your home be repossessed if you can't repay your mortgage when you are supposed to?

  • Repossession is the last resort. Lenders will try their best to help you avoid that situation and find a better solution. However, you may have to sell your home to repay your mortgage is you don't have an alternative plan.

So what should you do if you have an interest-only mortgage?

If you have don't have a repayment plan:

The longer you leave repaying your mortgage, the fewer options you will have to get a plan in place and the greater the impact on your budget.

Here is what you can do:

  • Use your savings to reduce your mortgage loan - Add up any savings you have already - decide if you can release any to reduce the loan.

  • Use online budget planners - Budget planners can help you to see how much spare cash you have each month.

  • Start repaying the original loan - Contact your lender and ask about switching to a capital and interest mortgage, which means you can start paying off your original loan.

  • Get extra time to pay off original loan - If your budget is tight, ask about switching to part repayment and part interest-only to start with or possibly extending the term of your mortgage to give you extra time to pay more towards the original loan.

  • Speak to a financial adviser to see what you need - Financial advisers can recommend how much you will need to start investing now to cover the mortgage by the end of the term.

The FCA report is bad news for homeowners with interest-free only mortgages. Credit: Anthony Devlin/PA Wire

If you have a repayment plan already:

It's important to check regularly that your repayment plan is still on track to cover your mortgage. The sooner you act, the better the result.

  • Check how many months and years your mortgage has to run.

  • Contact your financial adviser to see if you are on track - You can also contact your investment provider or fund manager to ask if your investments are on track to repay your mortgage at the end of the mortgage term.

  • Ask for how much extra you need to invest to repay mortgage - A financial adviser can give you an estimate of how much you need to invest to make sure you are still on track.

  • Make overpayments - Contact your lender to see if you can make overpayments and if you need to pay a fee to do so. Check with your lender if you will have to pay any early payment charges.

  • Use online budget planners - Budget planners can help you to see if you can afford to make overpayments on your mortgage.

  • Ask adviser for best course of action.

Source: Money Advice Service